SEC Scales Back Financial Disclosures for Business Combinations

On May 21, 2020, the U.S. Securities and Exchange Commission adopted amendments to its rules and forms governing the financial information registrants are required to provide for significant acquisitions and divestitures. We expect the amendments will decrease the time and cost of preparing financial statements required in business combinations.

When a registrant acquires a significant business, other than a real estate operation, SEC rules generally require the registrant to provide separate audited annual and unaudited interim pre-acquisition financial statements of that business. The number of years of financial information that must be provided depends on the relative “significance” of the acquisition to the registrant. SEC rules also require registrants to file unaudited pro forma financial information relating to the acquisition or disposition. Pro forma financial information typically includes a pro forma balance sheet and pro forma income statements based on the historical financial statements of the registrant and the acquired or disposed business, including adjustments to show how the acquisition or disposition might have affected those financial statements.

The amendments, among other things:

  • update the SEC’s significance tests by:
    • revising the investment test to compare the registrant’s investments in and advances to the acquired or disposed business to the registrant’s aggregate worldwide market value;
    • revising the income test by adding a revenue component;
    • expanding the use of pro forma financial information in measuring significance; and
    • conforming the significance threshold and tests for disposed businesses to those used for acquired businesses;
  • modify and enhance the required disclosure for the aggregate effect of acquisitions for which financial statements are not required by eliminating historical financial statements for insignificant businesses and expanding the pro forma financial information;
  • require the financial statements of the acquired business to cover no more than the two most recent fiscal years;
  • permit disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;
  • permit the use of, or reconciliation to, International Financial Reporting Standards as issued by the International Accounting Standards Board in certain circumstances;
  • no longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on significance;
  • clarify the application of rules regarding:
    • the determination of significance;
    • the need for interim income statements; and
    • the scope of the rule’s requirements;
  • amend the pro forma financial information requirements to improve the content and relevance of such information; more specifically, the revised pro forma adjustment criteria will provide for:
    • “Transaction Accounting Adjustments” reflecting the application of required accounting;
    • “Autonomous Entity Adjustments” to present the company as an autonomous entity if it was previously part of another entity; and
    • optional “Management’s Adjustments” depicting synergies and dis-synergies;
  • make corresponding changes to the smaller reporting company requirements, which also apply to issuers relying on Regulation A;
  • amend the definition of “significant subsidiary” to provide a definition that is specifically tailored for investment companies; and
  • add new rules to cover financial reporting for fund acquisitions by investment companies and business development companies.

While the amendments take effect on January 1, 2021, the SEC will permit voluntary compliance with the new rules before then.

Should you have any questions or need assistance, please contact us.

KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.


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